Tax on Dividends

The Government is introducing a new tax on dividends from 6 April 2016.

This is likely to increase the tax payable by small company owners who draw their money out of the company as a small salary with the balance as dividend.

How it will work

  • All dividends will be paid gross – the 10% tax credit will be abolished

  • The first £5,000 of dividends will be tax-free

  • Beyond this allowance, taxpayers will pay an extra 7.5% tax compared to 2015/16

Tax Planning

  • In general, the tax bill for small company owners who draw most of their income as dividend is likely to increase

  • There may be scope to increase dividends in 2015/16 before the new tax is implemented

  • From 6 April 2016 it may be worth considering drawing the £5,000 tax-free allowance if not already fully utilised

  • A share portfolio producing over £5,000 in dividends may benefit from being transferred over a period of time into an ISA

Tax Planning

The tax will be payable through the self-assessment system.

It is possible that this may trigger payments on account so it will be necessary to plan for the tax due in January 2018 which may be particularly high.

Example of extra tax payable

A small company with profits of £30,000 may currently pay the following tax (assuming personal allowance of £10,600):

The same scenario in 2016/17 would be as follows:

As usual, if you have any queries on how this will affect you, we’ll be happy to help.